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Activision Plans a Massive Restructuring After Another Disappointing Quarter

It's been a tough year for many companies in the video-game industry. The encroachment of free-to-play titles like Fortnite: Battle Royale had many fearful about whether these games were siphoning off players from the leaders in the industry. Activision Blizzard (NASDAQ: ATVI) was among those looking for the answer to that question in recent months. And based on the company's fourth-quarter results, the answer is a resounding yes.

Activision reported record revenue of $2.38 billion, up 16.5% year over year, surpassing the company's guidance of $2.24 billion. Net bookings, which include sales the company has not yet earned, grew to a record $2.84 billion, up 7.6% year over year. But while revenue and net bookings were both records, they fell far short of Activision's guidance of $3.05 billion and analysts' consensus estimates of $3.04 billion.

A screen shot from Call of Duty: Black Ops 4 with animated images of players in a first-person-shooter game.
A screen shot from Call of Duty: Black Ops 4 with animated images of players in a first-person-shooter game.

Call of Duty: Black Ops 4 was the sole highlight for Activision Blizzard in an otherwise dreary quarter. Image source: Activision.

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These top-line misses carried down to the bottom line, as Activision reported adjusted earnings per share (EPS) of $0.90, significantly below both the company's guidance of $1.27, and analyst expectations of $1.29.

The best news in the release was the performance of Call of Duty 4: Black Ops, which generated more up-front sales than any other console franchise worldwide in 2018, a feat the series has accomplished for nine of the last 10 years. Another promising sign was that player engagement improved for the quarter. Activision's monthly active users (MAUs) increased to 356 million, up 3% sequentially after falling for three consecutive quarters. Unfortunately, MAUs were still down 7.5% versus the prior-year quarter. The uptick was mostly tied to the release of Call of Duty.

The big story wasn't necessarily the ongoing issue illustrated by the company's sagging results, but the fact that Activision says it now has a plan to address the problem.

The times they are a-changin'

On the earnings conference call to discuss the results, Activision CEO Bobby Kotick said, "2019 will require significant change to enable us to achieve our long-term goals and objectives."

To address the ongoing challenges facing the company and the rest of the video game industry, Activision plans a broad restructuring of its business. The number of developers working on its biggest franchises will be expanded by 20%. Titles like Call of Duty, Candy Crush, Overwatch, World of Warcraft, Hearthstone, and Diablo will all see increased developer counts. According to the company, this will result in more up-front releases, in-game content, and mobile and geographic expansion.

Activision will take a multi-pronged approach to funding that investment. First, the company will lower priority for games and initiatives that are not meeting expectations. Second, Activision will cut costs by integrating many of its sales, marketing, and sponsorship positions across the business, and lay off about 8% of its total workforce, removing what the company called "unnecessary levels of complexity and duplication" in certain parts of the business. With an estimated 9,600 employees last year, that means the company will reduce its staff by nearly 800 workers.

This restructuring steps cited above will cost the company a one-time charge of about $150 million, but will also stifle growth for the coming year. Restructuring temporarily diverts resources away from publishing games and toward hiring new developers, combining positions, assigning new duties, and completing layoffs -- all of which are disruptive and will hamper growth in the near-term.

Gamer raising his hands in the air in victory.
Gamer raising his hands in the air in victory.

Image source: Getty Images.

Looking ahead

Management repeatedly emphasized that 2019 will be a transition year, with less new content than investors and players might normally expect. That will have a big impact on Activision's financial results for the foreseeable future.

The company provided muted guidance for the year, pegging net revenue at $6.025 billion, a decline of 20% versus 2018. Profitability will be hurt even more, as Activision forecasts EPS of $1.18, a decline of 50% compared with the $2.34 it earned in 2018.

For the upcoming first quarter, Activision is guiding for revenue of $1.715 billion, down nearly 13% year over year, and EPS of $0.39, 40% lower than the prior-year quarter.

Investors cheered the restructuring plan, sending Activision shares up nearly 8% on the day after the announcement. That lift may be short-lived, as the company has a lot of work to do in the coming year.

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Danny Vena owns shares of Activision Blizzard. The Motley Fool owns shares of and recommends Activision Blizzard. The Motley Fool has a disclosure policy.